Question

Current Designs has two main product lines- composite kayaks, which are handmade and very labor intensive, and rotomolded kayaks, which require less labor but employ more expensive equipment. Current Designs’ controller, Diane Buswell, is now evaluating several different methods of assigning overhead to these products. It is important to ensure that costs are appropriately assigned to the company’s products. At the same time, the system that is used must not be so complex that its costs are greater than its benefits.
Diane has decided to use the following activities and costs to evaluate the methods of assigning overhead.

MBA 6045 F1-01 - 2008 - Managerial Accounting

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MBA6045F1012008

Topic 3

Week 3 Current Designs Case Problem

Week 3 Current Designs Case Problem

Current Designs has two main product lines- composite kayaks, which are handmade and very labor intensive, and rotomolded kayaks, which require less labor but employ more expensive equipment. Current Designs’ controller, Diane Buswell, is now evaluating several different methods of assigning overhead to these products. It is important to ensure that costs are appropriately assigned to the company’s products. At the same time, the system that is used must not be so complex that its costs are greater than its benefits.
Diane has decided to use the following activities and costs to evaluate the methods of assigning overhead.
Activities
Cost
Designing new models
$121,200
Creating and testing prototypes
152,000
Creating molds for kayaks
188,500
Operating oven for the rotomolded kayaks
40,000
Operating the vacuum line for the composite kayaks
28,000
Supervising production employees:
180,000
Curing time (the time that is needed for the chemical
processes to finish before the next step in the production process;
many of these costs are related to the space required in the building)
190,400
$900,100

As Diane examines the data, she decides that the cost of operating the oven for the rotomolded kayaks and the cost of operating the vacuum line for the composite kayaks can be directly assigned to each of these product lines and do not need to be allocated with the other costs.
Instructions
For purposes of this analysis, assume that Current Designs uses $234,000 in direct labor costs to produce 1,000 composite kayaks and $286,000 in direct labor costs to produce 4,000 rotomolded kayaks each year.

(a)   One method of allocating overhead would allocate common costs to each product line by using an allocation basis such as the number of employees working on each type of kayak or the amount of factory space used for the production of each type of kayak. Diane knows that about 50% of the area of the plant and 50% of the employees work on the composite kayaks, and the remaining space and other employees work on the rotomolded kayaks. Using this information and remembering that the cost of operating the oven and vacuum line have been directly assigned, determine the total amount to be assigned to the composite kayak line and the rotomolded kayak line, and the amount to be assigned to each of the units in each line.
(b)  Another method of allocating overhead is to use direct labor dollars as an allocation base. Remembering that the costs of the oven and the vacuum line have been assigned directly to the product lines, allocate the remaining costs using direct labor dollars as the allocation basis. Then, determine the amount of overhead that should be assigned to each unit of each product line using this method.

Answer 1

(a)

	Composite	Rotomolded
Directly assigned	28000	40000
Remaining amount allocated 50%
to each product line*	416050	416050
Total cost assigned $	444050	456050
Number of units	1000	4000
Cost assigned per unit $	444.05	114.01

*Remaining = 50% x [$900100 - $28000 - $40000)] = 50% x $832100 = $416050

(b)

Total OH costs (a)		832100
Direct labor cost (b)
Composite	234000
Rotomolded	286000	520000
OH rate (a) ÷ (b)		1.60

	Composite	Rotomolded
Directly assigned	28000	40000
Remaining amount allocated
based on direct labor costs*	374400	457600
Total cost assigned $	402400	497600
Number of units	1000	4000
Cost assigned per unit $	402.40	124.40

*Composite = 1.60 x $234000 = $374400

Rotomolded = 1.60 x $286000 = $457600